QUESTION 1

A farmer must decide which crop to plant next year on his land: corn, peanuts, or soybeans. The return
from each crop will be determined by whether a new trade bill with another country passes the Senate.
The profit the farmer will realize from each crop, given the two possible results on the trade bill, is shown
in the following payoff table:

Pass Fail
Corn 30,000 8,000
Peanuts 18,000 13,000
Soybeans 21,000 18,000

Determine the best crop to plant, using the following decision criteria. (3 points each)

Pinakamataas pipiliin
a. Maximax = 30 000
b. Maximin = 18 000
c. Minimax regret = Soybeans , 9 000

Pass Fail
Corn 30,000 -30 000 = 0 18 000 - 8,000 = 10 000
Peanuts 30 000 -18,000 = 12 000 18 000 - 13,000 = 5 000
Soybeans 30 000 -21,000 – 30 000 = 9 000 18 000 - 18,000 = 0

d. Hurwicz (a = 0.30)

Total

Corn 30,000( .3) + 8,000 (.7) 14 600

Peanuts 18,000 (.3) + 13,000 (.7) 14 500

Soybeans 21,000 (.3) + 18,000 (.7) 18 900

e. Equal likelihood

simplest form to calculate (30 000 + 8000) / 2

Total

Corn 30,000( .5) + 8,000 (.5) 19 000

Peanuts 18,000 (.5) + 13,000 (.5) 15 500

Soybeans 21,000 (.5) + 18,000 (.5) 19 500

Summary of Criteria Results

The decisions indicated by the decision criteria examined so far can be summarized as follows:

Criterion                                                      Decision (Purchase)

Maximax                                                       Corn
Maximin                                                        Soybeans
Minimax regret                                            Soybeans
Hurwicz                                                         Soybeans
Equal likelihood                                          Soybeans

Sample:

QUESTION 2
 Microcomp is a manufacturer of personal computers. It is planning to build a new manufacturing and
distribution facility in either South Korea, China, Taiwan, the Philippines, or Mexico. It will take
approximately 5 years to build the necessary infrastructure (roads, etc.), construct the new facility, and
put it into operation. The eventual cost of the facility will differ between countries and will even vary within
countries depending on the financial, labor, and political climate, including monetary exchange rates. The
company has estimated the facility cost (in P1,000,000s) in each country under three different future
economic and political climates, as follows:

COUNTRY DECLINE (minimax) SAME IMPROVE (minimin)

South Korea 21.7 19.1 15.2

China 19.0 18.5 17.6

Taiwan 19.2 17.1 14.9

Philippines 22.5 16.8 13.8

Mexico 25.0 21.2 12.5

Determine the best decision, using the following decision criteria. (3 points each)
a. Minimin = Mexico, 12.5

b. Minimax (21.7, 19.0, 19.2, 22.5, 25.0) = 19.0 select China

best of best

c. Minimax Regret Min (2.7, 5.1, 2.4 , 3.5 , 6) = 2.4 select Taiwan

COUNTRY DECLINE SAME IMPROVE Maximum Regret

(minimax) (minimin)
Input yung pinaka mataas, then sa pag decide ng
answer kunin yung pinakamababa

South Korea 21.7 – 19.0 = 2.7 19.1 – 16.8 = 2.3 15.2 – 12.5 = 2.7 2.7

China 19.0 – 19.0 = 0 18.5 – 16.8 = 1.7 17.6 – 12.5 = 5.1 5.1
Taiwan 19.2 – 19.0 = .2 17.1 – 16.8 = 0.3 14.9 – 12.5 = 2.4 2.4

Philippines 22.5 – 19.0 = 3.5 16.8 – 16.8 = 0 13.8 – 12.5 = 1.3 3.5

Mexico 25.0 – 19.0 =6 21.2 – 16.8 = 4.4 12.5 – 12.5 = 0 6

d. Realism (Hurwicz) Hurwicz (a = 0.40)

a = coefficient of optimism

Improve = a (optimistic)

COUNTRY Decline Improve TOTAL

South Korea 21.7 (.60) + 15.2 (0.40) 19.1

18.44
China 19.0 (0.60) + 17.6 (0.40)

17.48
Taiwan 19.2 (0.60) + 14.9 (0.40

Philippines 22.5 (0.60) + 13.8 (0.40) 19.02

20
Mexico 25.0 (.60) + 12.5 (0.40)

e. Equal likelihood Equally Likely (Laplace)

(21.7+19.1+15.2) / 3

COUNTRY DECLINE SAME IMPROVE EQUAL LIKELY

(minimax) (minimin) LAPLACE
AVERAGE

Divide 3

South Korea 21.7 19.1 15.2 18.67

China 19.0 18.5 17.6 18.37

Taiwan 19.2 17.1 14.9 17.067

Philippines 22.5 16.8 13.8 17.7

Mexico 25.0 21.2 12.5 19.567

Summary of Criteria Results

The decisions indicated by the decision criteria examined so far can be summarized as follows:

Criterion                                                      Decision (Purchase)

Minimin                                                       Mexico, 12.5
Minimax (21.7, 19.0, 19.2, 22.5, 25.0) = 19.0 select China
Minimax Regret Min (2.7, 5.1, 2.4 , 3.5 , 6) = 2.4 select Taiwan
Hurwicz                                                        Taiwan, 16.85
Equal likelihood                                          Taiwan, 17.067
 QUESTION 3

Given the following sequential decision tree, determine which is the optimal investment, A or B? Why?

First, the expected value of the payoffs is computed at each

probability node:

UMPISA SA DULOOO

EV Node 7 = .40 (300 000) + .60 (60 000) = 156 000

EV Node 8 = .20 (200 000) + .80 (70 000) = 96 000

EV NODE 9 = .35 (105 000) + .65 (40 000) = 62 750

Second step : EV Node Step 1 Total MINUS (-$00,000)

EV NODE 4 = 156 000 – 20 000 = 136 000

EV NODE 5 = 96 000- 17 000 = 79 000

EV NODE 6 = 62 750 – 9 000 = 53 750 < 55 000

Third Step :

EV NODE 2 : (.30 * 136 000) + (75 000 * .70) =93 300

EV NODE 3 : (0.15 * 79 000) + (0.55 * 55000) + (.30 * 80000) = 66 100

EMV of Investment A

93 300 – 70 000 = 23 300

EMV of Investment B

66 100 – 50 000 = 16 100

EMV of Investment A is higher than B. Hence, Investment A is the optimal investment

ANSWER:

Criterion                                                      Decision (Purchase)

Maximax                                                       Corn
Maximin                                                        Soybeans
Minimax regret                                            Soybeans
Hurwicz                                                         Soybeans
Equal likelihood                                          Soybeans

SOLUTION:

A. Maximax = 30 000 Corn

b. Maximin = 18 000 Soybeans
c. Minimax regret = Soybeans , 9 000

Pass Fail
Corn 30,000 -30 000 = 0 18 000 - 8,000 = 10 000
Peanuts 30 000 -18,000 = 12 000 18 000 - 13,000 = 5 000
Soybeans 30 000 -21,000 – 30 000 = 9 000 18 000 - 18,000 = 0

d. Hurwicz (a = 0.30)  Soybeans

Total
Corn 30,000( .3) + 8,000 (.7) 14 600
Peanuts 18,000 (.3) + 13,000 (.7) 14 500
Soybeans 21,000 (.3) + 18,000 (.7) 18 900

e. Equal likelihood

Total
Corn 30,000( .5) + 8,000 (.5) 19 000
Peanuts 18,000 (.5) + 13,000 (.5) 15 500
Soybeans 21,000 (.5) + 18,000 (.5) 19 500

ANSWER:

Criterion                                                      Decision (Purchase)

Minimin                                                       Mexico
Minimax                                                        China
Minimax Regret                                           Taiwan
Hurwicz                                                        Taiwan
Equal likelihood                                            Taiwan
SOLUTION:

a. Minimin = Mexico, 12.5 

b. Minimax (21.7, 19.0, 19.2, 22.5, 25.0) = 19.0 select China

c.Minimax Regret Min (2.7, 5.1, 2.4 , 3.5 , 6) = 2.4 select Taiwan

Maximum Regret
COUNTRY DECLINE  SAME IMPROVE 
 

South Korea 21.7 – 19.0 = 2.7 19.1 – 16.8 = 2.3 15.2 – 12.5 = 2.7 2.7

China 19.0 – 19.0 = 0 18.5 – 16.8 = 1.7 17.6 – 12.5 = 5.1 5.1

Taiwan 19.2 – 19.0 = .2 17.1 – 16.8 = 0.3 14.9 – 12.5 = 2.4 2.4

Philippines 22.5 – 19.0 = 3.5 16.8 – 16.8 = 0 13.8 – 12.5 = 1.3 3.5

Mexico 25.0 – 19.0 =6 21.2 – 16.8 = 4.4 12.5 – 12.5 = 0 6

d. Hurwicz (a = 0.40) Taiwan 

COUNTRY Decline         Same          Improve TOTAL

South Korea 21.7 (.30) + 19.1 (.30) + 15.2 (0.40) 18.32
China 19.0 (0.30) + 18.5 (0.30) + 17.6 (0.40) 18.29
Taiwan 19.2 (0.30) + 17.1(.30)+ 14.9 (0.40 16.85
Philippines 22.5 (0.30) +16.8(0.30) + 13.8 (0.40) 17.31
Mexico 25.0 (.30) + 21.2 (0.30) +  12.5 (0.40) 18.86
 
e. Equal likelihood 

EQUAL
LIKELY 
COUNTRY DECLINE  SAME IMPROVE 
Divide 3
South Korea 21.7 19.1 15.2 18.67
China 19.0 18.5 17.6 18.37
Taiwan 19.2 17.1 14.9 17.067
Philippines 22.5 16.8 13.8 17.7
Mexico 25.0 21.2 12.5 19.567
 

ANSWER:

EMV of Investment A is higher than B. Hence, Investment A is the optimal investment

SOLUTION: 

EV Node 7 =  .40 (300 000) + .60 (60 000) = 156 000

EV Node 8 = .20 (200 000) + .80 (70 000) = 96 000

EV NODE 9 = .35 (105 000) + .65 (40 000)  = 62 750

  

EV NODE 4 = 156 000 – 20 000 = 136 000

EV NODE 5 = 96 000- 17 000 = 79 000

EV NODE 6 =  62 750 – 9 000 = 53 750 < 55 000

EV NODE 2 : (.30 * 136 000) + (75 000 * .70)  =93 300

EV NODE 3 : (0.15 * 79 000) + (0.55 * 55000) + (.30 * 80000) = 66 100

EMV of Investment A

93 300 – 70 000 = 23 300

EMV of Investment B

66 100 – 50 000 = 16 100